Insurance has the worst moral hazard: the winning strategy is to sell a product that pretends to cover your customers but actually doesn't. Your customers give you money for nothing and they will only realize it once in a blue moon. You can probably buy off the few who are capable of causing actual blowback, and if that doesn't work just rebrand.
Until everyone becomes a contract lawyer capable of devoting weeks to insurance shopping every 6 months, the only good insurance market is a heavily regulated one, even though heavy regulation comes with its own gigantic bag of worms.
Payouts and premiums aren't where the money is in insurance. It's in the return on investments the insurer makes with the money they hold in trust. From an insurer's point of view, the best market isn't one with no payouts, but one where there is a highly predictable amount of payouts, because the better they can predict how much they need to payout, the more aggressive they can be with their investments.
Yeah, there's a decent amount of regulation around payouts to protect the consumer, but it pales in comparison to the regulations around making sure that the insurer has enough liquid assets on hand, that the total valuation of their assets (ie investments) remains large enough, and that they're charging a minimum amount of premium for the risk that they're taking on.
Yes, in a well-regulated insurance market the winning business model isn't deceit. That's the point of the regulations.
Deceit can take many forms, and I'd argue that undercapitalization is actually one of them. "There's a trap clause on page 23 of the telephone book contract" is only the simplest strategy an insurance company can use to lemon-drop. "We ask our customers to do an impossible information wrangling task and only review the paperwork if they get cancer, so that we have an excuse to drop them" is a slightly more evolved form. Loading up sacrificial business vehicles with risk and using bankruptcy to discharge obligations is the most advanced form of deceit-based insurance business models, because it provides plausible deniability. "We just tried to compete a bit too hard!" they can claim, even if they knew in their hearts exactly what they were doing: the age old practice of selling insurance that you had no intent of making good on.
Fortunately, we have a long record of historical evil tricks to draw on when crafting legislation, because I absolutely stand by my claim that the natural incentives (the ones that happen without careful legislation) in the insurance industry are overwhelmingly bleak, both on an absolute scale and relative to other industries.
I'm not saying it's not because of regulations. I'm saying it's not just the regulations on payouts and the regulations on payouts probably aren't even the most important, because all the regulation in the world around ensuring the insurer can't skip out on payouts will do nothing for "Oops we invested badly and have literally no money with which to pay your completely valid claim".
The payouts regulations are still good and necessary because that's way better than requiring people to find out the hard way through shitty claims processes and denials and word-of-mouth reputation, but they're in no way sufficient.
I'm not sure we disagree. We just allocate the benefit of the doubt differently.
> "Oops we invested badly and have literally no money with which to pay your completely valid claim".
It's 100% possible for this to be a genuine mistake. I'm sure that it happened as a genuine mistake more than once! However, it is also possible to do this on purpose: load up a business vehicle with increasing amounts of risk and extract as much of the premiums as one possibly can before it explodes. If this is done intentionally, it is exactly the same hustle as selling policies that one doesn't intend to make good on, it just uses a different mechanism to shirk the obligation.
Every company that does it on purpose will say that it happened by mistake, of course, and just as I am certain that it has happened multiple times as a genuine mistake, I am certain that it has happened multiple times on purpose.
Undercapitalization is the evolved form of the "sell a trash policy" hustle because it provides almost perfect plausible deniability. It makes sense that the greatest legislative effort would be spent heading it off.
> From an insurer's point of view, the best market isn't one with no payouts, but one where there is a highly predictable amount of payouts, because the better they can predict how much they need to payout, the more aggressive they can be with their investments.
Isn't the latter a strict superset of the former? No payouts is an easily predictable number. And for nonzero amount of payouts, the less those payouts sum to, the more money remains for continuous investing.
No, they're not a superset. You can have events with a very low probability and very little variance, events with very low probability and very high probability, higher probability with low variance, and high probability with very high variance.
Here's some random numbers,say for a hypothetical 100,000 hypothetical year long policies
low probability, low variance: E(total claims) := 20, V(total claims) := 1
low probability, high variance: E(total claims) := 20, V(total claims) := 20
higher probability, low variance: E(total claims) := 20,000, V(total claims) := 10
higer probability, high variance: E(total claims):= 20,000, V(total claims): 10,000
Premiums don't usually make their way into investing for a bit. They're used to cover claims and then business overheads and then even dividends first. First they go to claims, because there's usually regulations to prevent price gouging that require insurers to refund premium if the ratio of aggregate premium : aggregate claims gets too high (the regulation is on a state by state basis in the US). Then any remainder goes to any other outlay first, so that the invested money can be/stay invested into longer term investments. Only if those outlays can be completely covered by the premium (and i'm skipping over a few things like regulations regarding various levels of liquidity for different risk levels and other stuff) then yeah it can make its way over to the actual investment fund. But in general the business model for insurers is that underwriting profit, limited as it is by regulations, is primarily used for actually running day to day operations and isn't a reliable source for being turned over to the investing side. The investing side is primarily using the initial capitalization of the insurer and the returns from earlier investments.
One way of looking at insurance is that the insured is actually buying an option against the insured's capitalization with very limited exercise clauses, but the the insurer pays out exercised options with the money from other purchased options contracts.
No, it's sourced from the initial capitalization of the firm and then realized returns that are reinvested. You can't offer insurance until you're capitalized enough to handle claims on the same day the policy takes effect.
Ideally the premiums will cover payouts and day-to-day business expenses, so the invested money can just keep being reinvested, hopefully into longer term and more aggressive investments. The premiums and payouts get rolled into underwriting profit/income. And that can eventually get rolled into new investments.
Here, look at state farm for 2019[1].
Their underwriting gain was $777 million on $65.2 billion in total premium. Their investment income was $5 billion with a net worth of over $100 billion, which is more than 6 times larger their underwriting premiums.
Their profit ratio for underwriting is like 1.2% because they're not trying to maximize that profit. A large reason they're not trying to maximize it is that for admitted policies, there's usually an upper limit to how much aggregate premium can go to anything other than paying out claims (eg: [2] and [3]).
So for an insurer, they don't want to set themselves up to depend on premiums to fund the investment arm because 1) there's an upper limit on how much aggregate premium can go towards anything other than claims 2) there's no limit on how much aggregate premium can go towards claims, 3) growing premium haphazardly can result in less money available for investing due to other regulations that limit risk and require a certain amount of liquidity for claims.
To save those looking it up: medical loss ratio is the fraction of premiums an insurer spends on actual healthcare expenses. 10% means 90 cents of every dollar paid in premium goes to admin/profit/etc.
I wonder how MLRs interact with subsidies, backroom deals and manufacturer rebates - if an payer can inflate their MLR by double paying for a medication - but then they get a rebate back for half the cost they paid will MLR tracking catch that?
Payers often get incentivized to promote certain drugs via manufacturer kickbacks and I wonder if this system is also used to run around MLR requirements.
So that encourages greater payouts more or less synced with greater premiums in order to increase year over year real profits.
And given that the payouts are very nearly a function of how hard the insurance company can negotiate, they can simply choose to call off the negotiations when they reach their target amount.
Only up to a point, they still accept or recheck claims arbitrarily to get closer to their targets. Worse they have incentives to decrease efficiency by increasing paperwork etc.
Private medical insurance in the US is a horridly inefficient system. Separating the claims process from insurance companies hands might help, but their incentives are never going to line up with consumers.
Not internal paperwork. Think in terms of industry wide collusion not a single insurance company. If lobbing or an industry group can drive up healthcare costs via say paperwork or regulations then every health insurance company is “forced” to raise premiums and as the maximum profit per premium ratio is fixed that also increases the total possible industry wide profit.
Of course insurance companies are also in competition so they have individual incentives to keep premiums cost competitive.
I think even in terms of industry-wide collusion, the push of an MLR cap would be to decrease (money spent on) paperwork.
With R = revenue, P = profit, A = administrative expenses, and M = medical expenses, we have:
R = P + A + M
which we can rearrange a little bit to get
P = R - M - A
From the point of view of an individual company, clearly increasing our own expenses means less profit:
P₂ = R - M - (A + δ) = P - δ
But, as you say, if we force everyone to do likewise the situation is better because we can raise prices to raise revenue:
P₃ = (R + δ) - M - (A + δ) = P
This holds whether or not we have an MLR, but in either case assumes that demand is sufficiently inelastic that we can raise prices enough to make δ more revenue (it won't be a matter of simply raising prices by δ/(number of customers) because some customers may chose to purchase less insurance), and at best it puts is right back where we started.
Does the MLR cap have an impact?
MLR = M / R
MLR₃ = M / (R + δ)
MLR₃ < MLR
By raising our revenues to compensate for the additional expense, we find ourselves with a lower MLR. If we are not near the cap this has no effect; focusing on the other case we are forced to do something to raise the MLR. Where does that come from? Recall our present situation:
P = (R + δ) - M - (A + δ)
We can lower P or A, but our whole question here is whether we can raise P by raising (everyone's) A so doing the former defeats our purpose and the later contradicts our assumption. We are stuck raising M and further raising R (if market conditions allow it). In a sufficiently inelastic market this is possible, but I really don't see the case where we've forced some extra slop that allows us to raise profit.
Of course if I believe that my company is better able to handle the new paperwork than my competitors, that could help - but if the whole industry believes that's the case then most of them are wrong, and in any event I believe this incentive is weakened not strengthened by the MLR cap.
If paperwork keeps new entrants out of the market, that is something current participants can probably agree on, but that's true in any case and I don't see how the MLR cap makes it stronger.
I don't think this analysis changes if we pull executive compensation out of "administrative expenses" and treat it as something we're maximizing in addition to (or instead of) profit.
Don’t forget a regulation that says Profit <= some percentage of Medical Expenses. In effect you have a normal demand curve but company’s can’t raise prices past some limit. Assuming profit maximization occurs below that limit it has no effect. However, insurance is unusually inelastic in part because much of it is subsidized.
So while thinking in terms of total administrative costs seems reasonable there are two different numbers here, administrative costs for the insurance companies and administrative costs for the healthcare industry and that matters.
So again, assuming it’s the regulation not market forces limiting profits increasing Ma directly increases profits. Up to some limit rather than P < (Mm + Ma) * X% it’s P = (Mm + Ma) * X%. Thus creating incentives to increase Ma.
Ah, yes, administrative costs within the medical organizations are presumably paid by passing those costs on to (payers including) insurance companies as "medical costs" and that is presumably counted in the M in the MLR (I could imagine a system that avoids it - at, ironically, the cost of some more paperwork - but I don't expect it's what we do).
It is true that the MLR cap does nothing to motivate insurance companies to avoid increasing hospital paperwork. I don't see that it produces incentive to create it - yes, increasing payments to hospitals increases allowable profit, but in order to make that profit you need sufficient revenues and customers aren't paying because they want hospitals to do paperwork. I'm of a mind that (at the margin) increasing legitimate (or nearly legitimate) medical spending is typically pretty easy so there is no need to find alternative ways of paying hospitals more; if I'm mistaken about that then you raise an important point that probably deserves attention (if it hasn't got it in some way I'm unaware of).
Only to a degree because policies basically always have an upper limit on coverage.
If the payouts are dropping because there's a massive reduction in claims, then there's a pretty decent chance that paying the policy maximum on each claim still won't be enough.
Plus, profits don't come directly from the premiums anyway. They come from the investments the insurer makes with the premiums. So sure, they can try to convince policy holders to increase coverage which allows them to charge a higher premium, or they can work on their loss modeling and investment strategy to better predict their actual loss ratio (which means they can have less money in reserve and more money in investments) or get better returns on the investments. And those 2 are usually a better use of resources since increasing coverage means an individual conversation with each policy holder. That's a lot of human-hours compared to the modeling and investing.
> So sure, they can try to convince policy holders to increase coverage which allows them to charge a higher premium
Or they just stone wall and increase premiums anywhere they can until they hit targets. Like at a previous job I had at a 250 employee company where premiums went up $150/m one year because the previous year had two families had a kid get (very different kinds of) cancer out of the blue. You'd think that shopping around would've helped in that case, but the word got out somehow to the other insurance companies and they were giving us similar quotes.
The power relationship is very very tilted in the insurance company's favor and they can more or less dictate terms.
> Like at a previous job I had at a 250 employee company where premiums went up $150/m one year because the previous year had two families had a kid get (very different kinds of) cancer out of the blue.
It's bad enough that I've heard office gossips complain about other employees leveraging their healthcare turning into higher premiums the year after. Like, as evil as complaining their coworker's kid got cancer.
When employees go through big health events it's hard to keep it under wraps in a work environment... especially in this "race to the bottom" society we happen to live in. You can bang on about privacy all you want, but people talk.
I guess I'm shocked it happened in an office of ~250 as I've always seen it happen at much smaller places.
>It's bad enough that I've heard office gossips complain about other employees leveraging their healthcare turning into higher premiums the year after. Like, as evil as complaining their coworker's kid got cancer.
That is how it would have to work if the employer wants to restrict the risk pool to the company's employees. After all, money has to come from somewhere.
But employers are welcome to participate in healthcare.gov plans where the risk pool is much larger (across the whole state), and where individuals in the company cannot be solely blamed for increases in healthcare costs:
It's bad enough that I've heard office gossips complain about other employees leveraging their healthcare turning into higher premiums the year after. Like, as evil as complaining their coworker's kid got cancer.
>You'd think that shopping around would've helped in that case, but the word got out somehow to the other insurance companies and they were giving us similar quotes.
Employers are welcome to purchase healthcare.gov plans that are not allowed to price based on pre existing conditions:
> Employers are welcome to purchase healthcare.gov plans that are not allowed to price based on pre existing conditions:
Which are stupid expensive for anyone much above the poverty level.
> If an employer wants to self insure and restrict their risk pool to only their employees, then they have to pay for it
A 250 person company wasn't self insuring or restricting their risk pool to only their employees. They wouldn't be negotiating premiums with an insurance company if they were self insuring.
If they were not restricting their risk pool, then how would a couple kids with cancer affect the company's premiums? The costs would be distributed across a much larger population.
When I was shopping around for health insurance for my businesses, the premiums were the same as what they would have been individually on healthcare.gov. Kaiser has a good report showing the costs are not that different based on firm size:
The cost of healthcare is pretty predictable, and spread over a sufficient population converges to the same numbers. Only option I can think of is people were thinking that the employer reduced their portion of healthcare they were subsidizing, and so people thought premiums were going up since the size of the portion they were expected to pay went up? Most people do not really know to look at box 12 code DD of their W-2 to know what is happening with their healthcare insurance premiums.
Because the premiums even for the larger risk pool can be negotiated with the insurance company. And if you suck at negotiating (like our HR), then you can accept at face value the arguments the insurance company makes about how much you're costing them, and how they'll just drop you if you don't accept higher premiums.
And I'm going to guess that your businesses had very, very few employees? To the point of not being worth negotiating with from the insurance company's perspective?
And Kaiser isn't run like most insurance companies.
Kaiser is short for Kaiser Family Foundation, which compiles nice reports about healthcare in the US. Using their reports does not have anything to do with Kaiser the company. Although their insurance side is similar to any other health insurer.
>And I'm going to guess that your businesses had very, very few employees? To the point of not being worth negotiating with from the insurance company's perspective?
Yes, but that was my point about businesses being able to just buy the health insurance plans available on healthcare.gov. Earlier you mentioned the healthcare.gov plans were:
>Which are stupid expensive for anyone much above the poverty level.
But the data does not support that. Average annual employer sponsored insurance is $7,675 for single PPO coverage in 2019:
So employers can probably save money going to the healthcare.gov plans, albeit with higher out of pocket maximums probably. But at least a couple kids with cancer would not throw off the premiums.
The Affordable Care Act (Obamacare) eliminated lifetime coverage limits. There are also limits of the minimum medical loss ratio.
Unlike property and life insurers, medical insurers generate very little income from investments. Premium revenue comes in at about the same rate as claims are paid out. They don't have large reserves to invest. And most large employers are self insured anyway, so the ”insurance" company just acts as a claims administrator.
I know that any anti-capitalism comments get immediately downvoted here but yeah...
The privatization of healthcare is a conflict of interest which is a product of our hyper-capitalistic society. You can't make a profit center out of human services without dehumanizing it in the process - the very nature of profit/capitalistic societies means someone has to lose and I see no place for these interests in healthcare or education.
Edit: yep - expected that. Maybe someone argue as to why privatization (which is a product of capitalism) isn't a conflict of interest in regards to healthcare?
Private health care is adversarial (so you have to look out for your own interests) but this does not automatically imply a conflict of interest. It may become a conflict of interest if you get your advice about which tests or treatments to undergo from the same health care provider who profits from you taking that advice, but this is something which you have control over: Get your advice from one place and have the work done somewhere else, just as you would for e.g. home inspections.
It's not as if public health care doesn't have moral hazards of its own, including conflict of interest. The system may officially be non-profit but the interests of its workers and administrators (profit-oriented or otherwise) do not necessarily align with those of the patient.
>the very nature of profit/capitalistic societies means someone has to lose
If by 'profit/capitalistic societies' you mean those allowing for voluntary exchanges between its people, I would disagree. As an adherent to the subjective theory of value, I think it is common that both parties in an exchange would consider themselves 'winners.' [0]
The reason I am firmly in this school of thought is that I've made the absolute mistake of a decision to try for "win-win" situations in a capitalistic society, specifically in regards to contract negotiations and ultimately pricing/billing.
When I'm making sure that the person on the other end of the table "wins" I'm putting myself at a capitalistic disadvantage; and - if both parties "won" then didn't both ultimately lose?
I get your ideal, but when money is involved I find that the "win-win" is very much that: just an ideal. And, anecdotally over the years I've found many business experts write on the topic of why "win-win" is a losing position which validates my position on this.
What is the definition of "win-win" that you are against?
I'm not familiar with Jim Camp, but the term is vague. The linked article to me mainly seems to argue that:
- the side with a better BATNA has more negotiating power (yes, of course) and
- a negotiator should avoid agreeing to a bad deal out of desperation (yes, of course - but not always easy to do)
I'm not sure how the concept of "win-win" specifically plays into it, so I think this is where definitions are useful.
To me, win-win doesn't make sense for transactional negotiations where there is only one dimension (usually price), but CAN happen for more complex negotiations with multiple dimensions where each dimension has different value to each party (price, time, volume commitments, etc...)
> if both parties "won" then didn't both ultimately lose?
No, because even in a capitalist society "winning" is defined by each party's relative improvement over the state they would be in if they didn't come to an agreement and make the trade—not by some absolute measure of whether they did better than the other party. A "win-win" is simply an agreement where both parties are better off for making the trade. This is the usual state of things when both parties are free to accept or decline and there is no deception (fraud) involved, since both parties need to accept the agreement and they will only do so if they believe that doing so benefits them. In rare cases one or both parties may be mistaken about the benefit, but they know their own business better than anyone else and are best positioned to judge the expected value of making the trade based on the information available at the time.
I have to agree with you for the most part, as a Canadian, I know our healthcare system is flawed, deep systemic problems, problems I'm not even familiar with. However, we don't have to deal with any of these price lists or copays or pre-approvals or debt (inside the scope of hospitalisation)
I've even heard arguements that many of the pitfalls stem from privatised aspects.
I'm a fairly capitalist person, but there is something awfully and fundamentally wrong about a society that monetizes well-being and health.
> However, we don't have to deal with any of these price lists or copays or pre-approvals or debt (inside the scope of hospitalisation) I've even heard arguements that many of the pitfalls stem from privatised aspects
Many of the current US medical problems (bureaucratization of medicine) actually evolved out of massive government regulation with debatable value. EMRs, ICD/coding, the bureacracu that eats up 25% of your doctor's day? It is mainly for insurance companies and Medicare/Medicaid.
> I'm a fairly capitalist person, but there is something awfully and fundamentally wrong about a society that monetizes well-being and health
All the medical providers (doctors/nurses/therapists/techs/PAs/etc) do not work for free, and there is a significant logistics and technology tail in providing medical services at huge scale.
If you really want to go after waste in medicine ask the following questions:
(1) How much are the nonclinical hospital mgmt & insurance executives paid?
(2) What is the ratio of clinical to non-clinical personnel?
(3) Why is the US subsidizing the vast majority of the medical research, and drug profits for the entire world?
These are serious questions because, as my nearby regional hospital group was firing hundreds of nurses during COVID, their CEO was collecting millions.
>...the very nature of profit/capitalistic societies means someone has to lose
The last time you bought milk did you lose or did the grocery store? The last time you paid money for a hair cut, who lost there?
The extreme regulation of all aspects of health care that has developed over the last century has improved some problems and created other problems - the problems specific to healthcare have little to do with the "the very nature of profit/capitalistic societies"
> The last time you bought milk did you lose or did the grocery store?
There's way more people involved in that supply chain then me and the store. This is an over simplification.
Outside of the obvious answer of "the cows" - factory farming has been destroying my home state causing huge problems in rural America. Also - the environment. Big time the loser there is the environment for literally any bovine farming.
> The last time you paid money for a hair cut
When I was getting my hair cut professionally I tipped a $20 because I knew the gal cutting my hair working at the midwestern mall Regis Salon was making jack-all. I knew this because I worked at Geeksquad with her boyfriend, eventually husband. If I were not to tip well she would be at-risk for making minimum wage for that hour - and since you can't support yourself on minimum wage I see that as her losing.
I've always tipped my butt off because I know without that they lose.
---
So yeah - sorry... I anecdotally do see losers in the situations you described. I don't have to look hard to see them.
>Big time the loser there is the environment for literally any bovine farming.
Factory farming probably does cause externalities that aren't addressed. People could choose to buy from grocers who only source from smaller farms but there isn't as much interest in that due to price sensitivity.
>...and since you can't support yourself on minimum wage I see that as her losing.
Even in the case where you didn't tip, she likely would have preferred having the work than there not being a job available at that location.
Until everyone becomes a contract lawyer capable of devoting weeks to insurance shopping every 6 months, the only good insurance market is a heavily regulated one, even though heavy regulation comes with its own gigantic bag of worms.